Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Date:
November 12, 2010
To:
[Client]
From:
Lisa Papineau
Real Property Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
RITS/No:
117968
Subject:
GST/HST
Transfer of share and associated real property rights and GST/HST new housing rebate availability
This memorandum is in response to our telephone conversation of April 30, 2009, and your letter dated August 26, 2009, regarding the transfer by [...] (the Registrant) of a share in a homeowners corporation and associated real property rights to [...] [the individual].
The Registrant has credited a Type 1B GST/HST new housing rebate (NHR) to [the individual] for the purchase of new housing and the lease of the related land with respect to this transaction. You are now reviewing this rebate claim and question whether the Registrant in fact sold new housing to [the individual] and whether the Registrant's supply to [the individual] is one for which an NHR is available.
All legislative references are to the Excise Tax Act (ETA), unless otherwise indicated.
You have provided the following documents for our consideration:
a) Commercial head lease agreement (Head lease) dated [mm/dd/yyyy].
b) Amendments to the Head lease dated [mm/dd/yyyy], [mm/dd/yyyy], and [mm/dd/yyyy]
c) Sublease agreement (Sublease) dated [mm/dd/yyyy], including [...].
d) The [...] Application for Registration of the Sublease.
e) Vendor's Statement of Adjustments.
Statement of Facts
1. The parties to the Head lease are:
• Her Majesty in right of Canada, [...], as "the Lessor,"
• the Registrant, as "the Lessee," and
• [...] as "the Homeowners Corporation."
2. The lands subject to the Head lease are in the province of [...], all of Lot [...] as shown on [...].
3. Recital [...] of the Head lease provides that the Lessee intends to construct units and common facilities on the lands.
4. Section [...] of the Head lease provides that the Lessee will not use the lands and improvements to the lands for any purpose other than for the development, construction, occupation and operation, for residential purposes, of units, the common facilities, and other ancillary facilities and services associated with such a development.
5. Section [...] of the Head lease provides that improvements to the lands will be the property of the Lessor at the expiration or earlier termination of the Head lease. Further, the Lessee is not permitted to remove any of the improvements from the premises without prior written consent of the Lessor, which consent may be unreasonably and arbitrarily withheld.
6. Schedule [...] to the Head lease provides that improvements mean all buildings, structures, works, facilities, services, landscaping and other improvements by whomsoever made including all equipment, machinery, apparatus, and fixtures forming part of, or attached to, the improvements, but excluding personal goods, and includes any individual part or component of the improvements. Personal goods mean goods and chattels of the Lessee or Sublessee that are not fixtures under common law.
7. Section [...] of the Head lease provides that if the Lessee subleases the premises to another person:
• the sublease must terminate no later than one day before the Head lease terminates;
• the sublease is subject and subordinate to the Head lease;
• the sublessee is bound to all terms of the Head lease that relate to the subleased premises; and
• each sublessee will be the registered holder of one share in the capital of the Homeowners Corporation. When the initial sublease for part of the premises is issued, a share in the Homeowners Corporation will be issued or transferred to the Sublessee. When a Sublessee assigns a sublease, the Sublessee must concurrently transfer the share in the Homeowners Corporation, issued in respect of the sublease, to the assignee of the sublease.
8. The parties to the Sublease are:
• the Registrant as "the Sublessor,"
• [the individual] as "the Sublessee," and
• [...] as "the Homeowners Corporation."
9. Recital [...] of the Sublease states that the Sublessor wishes to lease the leased premises to the Sublessee and the Sublessee wishes to lease the leased premises from the Sublessor.
10. Section [...] of the Sublease provides that "leased premises" means a single family residential dwelling contained within a Building, having a separate entrance, and more specifically described as Unit [...] as shown in Schedule [...] to the Sublease.
11. Schedule [...] to the Sublease identifies the leased premises as Unit [...] within Lot [...], [...], Province of [...]. The boundaries of the leased premises are midway between the surface of the structural portion of the wall, floor or ceiling that faces the leased premises and the surface of the structural portion of the wall, floor or ceiling that faces other residential dwelling units, the common areas or any of the lands.
12. The Schedule to Schedule [...] depicts the location of Unit [...]. It shows that Unit [...] is located in Building [...] on Lot [...], which consists of four units ([...] through [...]). Note 1 on this Schedule states [...]. As such, we understand that the leased lands are not governed by [...] [reference to provincial legislation].
13. Section [...] of the Sublease provides that one share of the Homeowners Corporation shall be transferred to the Sublessee on the completion date. Each Sublessee shall own one share. The completion date is defined by paragraph [...] to mean the date the Sublease is registered [...].
14. In the case of assignment of the Sublease, the share issued in respect of the Sublease must be transferred to the assignee. No share shall be dealt with independently from the Sublease.
15. Section [...] of the Sublease provides that the common areas and common facilities be subleased to the Homeowners Corporation. The duties of the Homeowners Corporation, as sublessee, are to control, manage, and administer the common areas and facilities for the benefit of all sublessees. The rights and obligations of the Homeowners Corporation are subject and subordinate to the rights of the sublessors under their respective Sublease.
16. Section [...] of the Sublease provides that the total amount payable by the Sublessee includes:
• "Basic rent" of $[...];
• "Additional rent" which includes, in part, the Sublessee's proportionate share of the common costs, as and when required; and
• GST or other taxes, if any, that may be payable "in respect of the Rent..."
17. Section [...] of the Sublease provides that if the Sublessee pays the rent due and performs its obligations under the agreement, the Sublessee shall peaceably possess and enjoy the leased premises for the Term. "Term" is defined by paragraph [...] to mean the term of the Sublease beginning on [mm/dd/yyyy], and expiring on [mm/dd/yyyy], unless the Sublease is terminated earlier pursuant to the Sublease.
18. The Vendor's Statement of Adjustment identifies the $[...] as the "Sale Price" whereas the Sublease identifies this amount as "Basic Rent." The Statement of Adjustment also indicates $[...] as an amount of GST on the "Sale Price" and a $[...] as a GST rebate "assigned to Vendor by Purchaser."
19. Sections [...] of the Sublease provide that the Sublessee will only use the leased premises for residential purposes and that the Sublessee, its tenants, and guests shall use the common areas and common facilities, but only in accordance with the Sublease.
20. Section [...] of the Sublease provides that the Sublessee is permitted to assign or transfer the whole or any part of its interest in the Sublease and the leased premises, subject to the conditions listed in that section. If the Sublessee assigns or transfers all or any part of its interest in the Sublease, the share in the capital of the Homeowners Corporation held by the Sublessee be must be transferred to the assignee or transferee at the same time that the Sublease is assigned.
21. Section [...] of the Sublease provides that the Sublessee will, at all times during the term of the Sublease and at its own cost and expense, repair, renew, replace and maintain the leased premises in good and tenantable condition in every respect as would a careful owner in possession.
22. Section [...] of the Sublease provides that the Sublessee must insure against claims for personal injury, sickness, illness, disease or disability, death or property damage or loss arising out of the ownership, occupation, maintenance and use of the leased premises by the Sublessee.
23. Section [...] of the Sublease provides that the Sublessor agrees to take out and maintain an all risks insurance policy covering the buildings and improvements on the lands against fire and other perils in an amount not less than the replacement cost of such buildings and replacements.
24. Section [...] of the Sublease provides that at the end of the Term or earlier termination of the Sublease, the Sublessee must deliver to the Sublessor vacant possession of the leased premises.
25. Sections [...] of the Sublease provide that in the event of Sublessee default, the Sublessor can re-enter and re-take possession of the leased premises and in certain cases can terminate the Sublease or re-lease the leased premises as agent for the Sublessee. If the Sublessor terminates the Sublease due to Sublessee default, the Sublessor shall use its reasonable efforts to lease the leased premises through the issuance of another sublease for the leased premises to a third party purchaser on terms and conditions substantially the same as set out in this Sublease. The money received by the Sublessor from the other sublessee must first be applied to the amount owed by the Sublessee to the Sublessor under the Sublease.
26. Section [...] of the Sublease provides that the Sublease is subject and subordinate to the Head lease and the Sublease will terminate upon termination of the Head lease.
ISSUE
You would like to know if the Registrant's supply to [the individual] is one for which an NHR may be available.
RESPONSE
The Registrant's supply to [the individual] under the Sublease is a supply of a residential unit made by way of sublease and for which an NHR is not available.
ANALYSIS
An NHR may be available to [the individual] under section 256 if [the individual] constructed or substantially renovated, or hired another person to construct or substantially renovate, a residential complex (iFootnote 1) that is a single unit residential complex or a residential condominium unit (iiFootnote 2) and [the individual] meets all of the other rebate conditions. We have no information to support that [the individual] constructed or substantially renovated a residential complex, or that [the individual] hired someone else to do so for [the individual]. For example, there is nothing in the Sublease to suggest that [the individual] engaged the Registrant to construct a residential complex and the leased premises are described under the Sublease as a residential dwelling contained within a building and with a separate entrance. Based on the plan included as the Schedule to Schedule [...] to the Sublease and the language of the Sublease, the dwelling appears to be a completed rowhouse unit. Assuming that the construction of the residential complex is substantially complete upon entering into the Sublease, [the individual] is not entitled to an NHR under section 256.
Alternatively, [the individual] may be entitled to claim an NHR under section 254 (if [the individual] purchased a residential complex that is a single unit residential complex or a residential condominium unit from a builder of the complex) or under section 254.1 (if [the individual] purchased the building part of a residential complex and obtained the land part of the complex from the builder under a supply by way of lease, licence or similar or by way of assignment of such an arrangement) and [the individual] meets all of the other rebate conditions for those provisions.
Did the Registrant sell a residential complex or residential condominium unit to [the individual] under the Sublease?
A "sale" in respect of property is defined in subsection 123(1) to include "any transfer of the ownership of the property and a transfer of the possession of the property under an agreement to transfer ownership of the property." The ETA does not define "ownership," however Black's Law Dictionary, 7th Edition, 1999, defines ownership, in part, as the "collection of rights allowing one to use and enjoy property, including the right to convey it to others."
In general, "ownership" of real property refers to the legal ownership of the property and a transfer of ownership refers to any transaction in which a vendor transfers all of their rights and obligations with respect to the property to another person. These rights include the right of possession, the right to alter or destroy the property, and the right to dispose of the property.
The Sublease identifies and consistently refers to the Registrant and [the individual] as the "Sublessor" and "Sublessee," respectively. Recital [...] of the Sublease states the intent of both parties, as follows:
"The Sublessor wishes to lease the Leased premises... to the Sublessee, and the Sublessee wishes to lease the Leased premises from the Sublessor...."
The language and content of the remainder of the Sublease support the stated intention for the supply of Unit [...] by way of lease. This support is seen in the Sublease references to the consideration payable by [the individual] as basic rent and additional rent. Further, under section [...] of the Sublease, the interest that [the individual] holds under the Sublease, and is permitted to assign or transfer, is referred to as an interest in the Sublease and the leased premises (i.e., [the individual's] interest is not referred to as an ownership interest in Unit [...]. In addition, section [...] of the Sublease stipulates that as long as [the individual] pays the agreed upon rent, [the individual] is entitled to possess and enjoy Unit [...] for the term of the Sublease. At the end of the term, [the individual] must deliver vacant possession of Unit [...] to the Registrant.
These facts alone strongly support that the Registrant's supply to [the individual] is one of a residential unit (iiiFootnote 3) made by way of sublease. In addition, the Sublease does not contain any offer to sell or purchase a residential complex or to sell or purchase a leasehold or sub-leasehold interest in such a complex, nor is there any indication that it was the intent of either party to do so.
Further, the Head lease the Registrant entered into with the Crown, prohibits the Registrant from removing any of the improvements made to the lands without the prior written consent of the Crown, which may be unreasonably and arbitrarily withheld. The Head lease states that upon expiration or earlier termination of the Head lease the improvements will be the property of the Crown. Based on the wording of the Head lease, the Registrant does not have ownership of Unit [...], or the building in which it is located, and is therefore, unable to transfer that ownership to [the individual].
In addition, Unit [...] is located in Building [...], which consists of [...] units (numbered [...] through [...]). There is no evidence in the information obtained that Building [...] is a condominium complex (ivFootnote 4) or that Unit [...] is a residential condominium unit. Since Unit [...] is not a residential condominium unit, it would not be possible for the Registrant to sell Unit [...] separate from the remainder of the building since the whole building would be under one legal title; in fact, it appears that more than one building is under the one legal title.
While a sale of Unit [...] to [the individual] has not occurred, it is possible that the Registrant could sell its leasehold interest in Unit [...] to [the individual]. However, we have no documents indicating there was any agreement for the Registrant to sell or assign to [the individual] its rights and obligations under its Head lease with the Crown, nor do we have any documents indicating that [the individual] replaced the Registrant as the Lessee under the Head lease with the Crown. The Registrant remained the Lessee under the Head lease and, according to its rights under that lease, the Registrant entered into the Sublease with [the individual] for the supply of Unit [...] by way of sublease.
Therefore, [the individual] has not purchased a residential complex or a residential condominium unit from the Registrant and is not entitled to claim an NHR under section 254. Further, [the individual] has not purchased the building part of a residential complex and is not entitled to claim an NHR under section 254.1.
Share in the Homeowners Corporation
We would like to point out that the Registrant's transfer of a share in the Homeowners Corporation, as required by both the Head lease and the Sublease, does not constitute a sale of a residential complex or change the nature of the Registrant's supply in any way that would entitle [the individual] to claim an NHR. In fact, in this particular case, the application of Policy Statement P077R2, Single and Multiple Supplies, leads us to the conclusion that the transfer of the share in the Homeowners Corporation is not a supply by itself, but is merely an element of the predominant, single supply of the right to use real property (i.e., Unit [...], the common areas and common facilities).
Specifically, P-077R2 indicates that multiple supplies occur when one or more elements of a supply can sensibly or realistically be broken out. Conversely, two or more elements are part of a single supply when the elements are integral components; the elements are inextricably bound up with each other; the elements are so intertwined and interdependent that they must be supplied together; or one element of the transaction is so dominated by another element that the first element has lost any identity for fiscal purposes.
In this case, [the individual] does not have the option to acquire the right to use Unit [...] separate from the share in the Homeowners Corporation. The right to use the Unit is tied directly to the ownership of the share which provides for the right to use the common areas and facilities. Therefore, the transfer of the right to use Unit [...], i.e., the supply of Unit [...] made by way of lease, and the transfer of the share in the Homeowners Corporation are interdependent and each is an integral part of what the Registrant is supplying under the Sublease. In applying P-077R2, we conclude that the Registrant's transfer of a share in the Homeowners Corporation is merely an element of the true, predominant supply of real property made by way of lease and is not a supply by itself. The Registrant's supply to [the individual] is that of a single supply of real property (i.e., the supply of Unit [...] made by way of sublease).
Additional information
Exempt supply of a residential unit by way of lease (including sublease)
Under section 6 of Part I of Schedule V to the ETA, a supply of a residential unit in a residential complex made by way of lease, licence or similar arrangement is exempt if that supply provides for the continuous occupancy of the unit as a place of residence or lodging by the same individual for at least one month.
Under the Sublease, the Registrant supplied Unit [...] to [the individual] by way of sublease for a term beginning on [mm/dd/yyyy], and expiring on [mm/dd/yyyy]. Under section [...] of the Sublease, [the individual] covenants with the Registrant that [the individual] will only use the Unit for residential purposes. Therefore, the Registrant's sublease of Unit [...] to [the individual] is exempt under section 6 of Part I of Schedule V to the ETA.
Rebate of payment made in error
As you may be aware, subsection 261(1) provides a rebate to a person who has paid an amount as or on account of tax where the amount was not payable by the person, if all other conditions for claiming the rebate are met. Subsection 261(3) contains one of these conditions, requiring that the person file an application for the rebate within two years after the day the person paid or remitted the amount.
If you require further clarification with respect to any of the issues addressed in this letter, please call me at 613-954-4393.
Lisa Papineau
i 1 Subsection 123(1) defines a residential complex to mean, in part, that part of a building in which one or more residential units are located, together with that part of any common areas and other appurtenances to the building and the land immediately contiguous to the building that is reasonably necessary for the use and enjoyment of the building as a place of residence for individuals.
ii 2 Subsection 123(1) defines a residential condominium unit to mean a residential complex that is, or is intended to be, a bounded space in a building designated or described as a separate unit on a registered condominium or strata lot plan or description, or a similar plan or description registered under the laws of a province, that includes any interest in the land pertaining to the ownership of the unit.
iii 3 Subsection 123(1) defines a residential unit to mean, in part, a rowhouse unit, condominium unit, or apartment that is occupied by an individual as a place of residence or lodging, supplied by way of lease for its occupancy as a place of residence or lodging for individuals, or has never been used or occupied for any purpose but is intended to be used as a place of residence or lodging for individuals.
iv 4 Subsection 123(1) defines a condominium complex to mean a residential complex that contains more than one residential condominium unit.
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UNCLASSIFIED
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